What is a PACE Loan?
Property Assessed Clean Energy (PACE) financing is a program in many states to encourage property owners to upgrade the energy efficiency of their home (or business), help with costs of flood or hurricane protection, and combat the impact of climate change.
In areas where PACE is in place, and for those who want to use the program, the municipality places an assessment on the property tax bill which can be paid back over an extended period of time. This technique eliminates costly upfront costs to major upgrades. Secondly, it allows you to begin saving money on electric and gas bills long before the loan is paid back which, in effect, diminishes the monthly assessment cost. And remember, since the loan is paid back exclusively through an assessment, there is no money down.
To successfully apply for a PACE loan, you must have equity in your home, a history of timely mortgage payments, and prove that you earn enough money to make payments on the additional debt. Since Florida has had a PACE loan in place for just several years, many folks may not be aware of it.
The owner has many acceptable options to choose from in upgrading his home: hurricane resistant windows, roof replacements, solar energy systems, hot water heaters, more efficient air conditioning systems, insulation, air sealing, etc.
Sounds great. So, what’s the downside? In essence, a lien is being placed on the home which must be paid monthly, or your credit score will suffer. Secondly, most PACE borrowers will end up paying about twice the actual cost of the upgrade, and lastly most banks require that you not sell tour home until the loan is repaid in full.
With average interest rates for PACE loans at 7%, borrowers can expect to pay about double the cost of the upgrade over a 20-year period.
Since many borrowers do not read the fine print before signing, many state governments now require PACE lenders to simplify forms or have a live agent explain the details in a recorded call. Many Florida lenders have quickly complied with both requirements.
According to Mike Lemyre, senior vice president of the lending company Ygrene, “Borrowers with excellent credit might save money by taking out a second mortgage or home equity line of credit. But for people with modest income, modest savings, and modest credit, PACE loans offer good value.
Because the federal programs won't insure mortgages on homes with PACE loans, many traditional lenders won't either, meaning the transferability advantage primarily benefits sellers in cash-only transactions, or through specialty lenders.
Obviously, the decision whether to take a Pace loan should be discussed with your financial advisor. And remember, in the vast majority of cases, the loan/lien must be paid off in full before the home can be sold.
To summarize, a PACE loan is best for people of modest means and less than sterling credit. If you fit this description and plan to live in your home for many years to come, PACE is something to seriously consider.